Customer lifetime value: make your store more profitable!
Focusing on new customers only leads to complete failure. A professional ecommerce business must not focus on getting new customers only, but to retain the existing ones.
How can you do that?
To give the best “numeric answer”, we use the customer lifetime value.
What is customer lifetime value precisely?
If you go to your local diner, but you do not like the food because you find a hair in your soup, and consequently you will never go back again, then your CLV equals the price of your meal, for example $10.
But if you spend $100 every weekend in the same hypermarket, your CLV reaches tens of thousands of dollars throughout the coming years.
Why is it important to you?
Because if you can estimate the amount of money to be spent on your products or services in the future, you will know how much effort, time and money is worth putting in the customer retention process.
If you give discount to someone you still don’t know if he or she plans to shop again in your store or this is the very reason he or she comes back. It is also important how many emails you send to your customers or how many times they are called by your salesperson – the more effort you invest into keeping your shoppers “active” the higher the CLV should get.
Having a banner on a news portal for $2000 generating 1000 new customers, we have a CAC of $2.
In a B2B environment, we’ll have a much bigger number if we target a multinational enterprise, using different methods like meetings in person, elaborating complex sales offers and direct sales tactics etc.
The main goal is not to reach the highest CLV possible only, but to exceed CAC expenses, because the other way round we have an inefficient marketing and sales approach, generating losses instead of profits.
How to calculate with these values?
In both cases, the math is quite simple. However, it may be hard to obtain the right and precise data.
Let’s begin with Customer Acquisition Cost
Calculating the cost of a campaign should not be problematic, but if you lack relevant data, you might need to think the whole thing over.
How will you know how many new customers you managed to acquire?
If you run traditional advertising campaigns you basically have no chance to get exact numbers – you can ask your shoppers afterwards, of course, if they took action because of your ad they met on television, radio, or in the papers, but the result would still only be an approximate figure.
Through online campaigns, however, you can track better what results you get after spending a certain amount on a campaign. You could as well raise some doubts after the campaign asking: Was it only that campaign that brought me all the customers? Was it just the final “push” in their decision making? But since you won’t be able to measure that, it won’t take you any further.
Additionally, monitoring your expenditures is not the only vital issue here, but you also need to know where your customers come from.
Let’s have a look at the Customer Lifetime Value!
To calculate the most basic form of CLV, you need three numbers:
- Average purchase value (in an online shop, this is the average shopping cart value),
- number of purchases (over a given period)
- customer acquisition cost.
Multiply the first two numbers and then subtract CAC. The result is the Customer Lifetime Value. For example, if acquiring a customer cost you $100, the average number of purchases (in a given time period) in that segment is 10 and the average purchase value is $10, you would get a CLV of zero.
Use segmentation to be able to measure more accurately: the RFM system
Your customers shop in your ecommerce store for different reasons and turn to you with different problems. Every one of them may have different desires, possibilities and can be convinced and reached through different methods and channels.
So it will not be enough to have an average figure in your pocket, because you will not be able to build a proper strategy on that.
You need to use segmentation to filter out those shoppers that generate losses, i.e. generate negative CLVs. You simply cannot spend the same amount on each customer and may come to the conclusion that you will not spend any money at all on segments that you may have considered significant.
It’s worth applying the RFM segmentation method which defines how valuable your customers really and then you can divide them into groups accordingly. RFM stands for the following:
- Recency: the time when a customer last purchased in your store (say, how much time has passed since the last purchase).
- Frequency: how often a customer purchases in your store in a given period.
- Monetary value: the amount he / she spends in that same period.
Based on this, you can create different segments. It’s up to you how many you want to work with, but try not to make it too complicated. You can then order your segments from most valuable to least valuable and then elaborate your targeted marketing campaigns based on that information.
How can you increase lifetime value?
In order to get more relevant figures to see more precisely if your marketing budget is spent wisely, when calculating lifetime value, you need to achieve three things. We now take a look at these.
How frequently do your customers shop in your store?
Even if the average shopping cart value does not change, with more frequent purchases customer lifetime value rises. Therefore what you need to do is persuade your shopper to return more often.
Effective email marketing can be a great tool: send relevant offers to your customers, better if these are personalized messages that most probably attract their attention. This requires a different kind of segmentation: you need to know how they found your online store, what kind of products they look for, what they bought etc.
If the product’s lifetime is soon to expire, (e.g. the customer bought a product 11 months ago with a service life of 1 year), remind him of this, offer him the product or a similar product with a discount.
Track what your shopper usually purchases. E.g. if she has a particular interest in baby clothes in a clothing online store, recommend her a few very relevant products (e.g. a set or accessories) in email.
If you indulge your regular customers, take special care of them, you can increase their loyalty.
You may not always offer them price discounts. You can also give them access to certain exclusive pieces of content or services that are not for everyday shoppers. You can create a scheme in which they can collect points later to be redeemed for free products.
You can target your audience with ads using AdWords: if, for example, you had a customer who bought pens, show him an ad of refills. If he put the pens in the shopping cart, but did not purchase them, show him the same products to make him return to your website.
How much do shoppers spend in your store?
Making shopping cart value higher is the purpose of every e-merchant. If you’ve been visiting your local grocery shop every day for 10 years and have been buying only a pack of bubble gums every time, you are still not a valuable shopper.
To become one, they should urge or “stimulate” you to fill your shopping cart with products, but you also should feel satisfied with that.
Cross-sell and upsell
There is a wide range of possibilities to convince your customers to add another item to their cart. You can offer them articles that are usually also bought together with that particular product already placed in the cart. On the product page you can show them other relevant or complementary products and you can also tell them that they can save money if larger quantities are ordered.
The point is to make them feel they really save money if they buy more items in one session. Thus you need to give them true benefits which they are happy with.
- Read more in this topic: 11 product page improvement tips for more conversions
Discounts, package deals
You don’t have to offer discounts all the time, but you can probably manage offering products in packages right away, even without any price discount, but simply because this way they are more convenient to purchase.
It can also work if you deliver the products for free or give a little gift if the total reaches a certain threshold amount.
- Read more in this topic: Magento discount system, Magento coupon use
How long will your shoppers stay with you?
It’s not enough to lead your customers to a few bigger purchases, you have to make them loyal as well. You need to make sure that it’s always a nice experience to shop in your online store by meeting all sorts of expectations not merely by offering nice products at good prices.
For this you can follow different tactics.
First, it is a good idea to build up excellent client service that can answer all questions and solve all kinds of problems. If your customers feel that their problems are important to you as well, that you want them to have a very nice experience while shopping, then they will prefer your store to other online shops where they may feel like being only wallets in human form.
There is more to loyalty schemes than just collecting points or stickers. You can also provide regular, long term rewards and deals, send little presents to your shoppers, invite them to exclusive events etc. – of course always keeping in mind that these marketing incentives should have a return on investment.
Maintain such channels through which you can constantly communicate with your customers: share new pieces of information, introduce your latest products, advertise your deals etc.
It is also recommended to have premium channels that help communication with only a smaller group of your customer base, like your old and loyal shoppers, and sharing some exclusive content and information with them.
No matter how much a new customer spends in your ecommerce store, he or she can never be your most precious shopper. Your goal is to have him or her return as frequently as possible for long years to come.
The more often your customers shop with you, the better your communication is, the more loyal they will become, and therefore the cost of “reactivation” will decrease. Thanks to this, you’ll have seriously reduced marketing and sales costs while your income will probably be stabilized.
In order to achieve all this, you’ll need to elaborate a complex and cost-efficient customer retention strategy based on the precise information that you have gathered on your customers.
Sales and marketing manager
István is an eCommerce Solution Specialist with a deep understanding of the project management side of development. By putting a great emphasis on optimizing business and ecommerce, he helps web stores align business goals with functionality and recommends the most effective options to meet objectives, while avoiding unnecessary customization and costs. István loves canoeing on the River Tisza and practising judo.